Perhaps it is a little harsh to refer to the US currency, a symbol of soft power throughout the globe and the foremost medium of exchange for decades as a dead cat. Nonetheless, the metaphor is appropriate and if that’s not enough for you, it’s done now anyway. To refer to the US Dollar as a dead cat is to invoke the saying in markets that even a dead cat bounces. It is to refer to the reality that even an ailing or condemned asset can still bounce on a short term basis despite its destiny to stay down. In the case of the Dollar there is no significant or at least new ailment. Rather 2021 was supposed to provide the tide to float all boats (read all other currencies) to the detriment of the safe-haven US Dollar. Those dynamics could still be afoot and therefore in store for the latter half of this year. However, the rally in the Dollar over the last week has changed FX market momentum and a break of impending resistance levels could put this dead cat in a collision course for a trampoline.
As a result of lower demand for cash, a higher appetite for consumption and investment, the Dollar is expected to weaken as the widespread recovery of the global economy following the now year-long pandemic is resolved. By contrast allocations towards high beta, commodity and emerging market currency exposures are expected to take their toll on the US dollar. Over the last week geopolitical tensions that we have already covered are justifying a short term reversal of risk trends also. So too in the fixed income market higher yields are drawing investors towards USD once again. Yesterday’s announcement that fully vaccinated people in the United States will be able to interact with each other indoors without PPE or social distancing is warming US economic sentiment. The $1.9tn stimulus package in turn is expected to turbo charge a recovery already set to be colossal. The US currency bid is therefore a reflection of the uneven recovery from the pandemic with America amongst those leading the charge both on vaccinations, economic growth and recovery and social liberalisation. So long as this imbalance continues, the correction of USD versus its major peers could continue.
The stronger Dollar has also created a setback for emerging market currencies, particularly those with large semi-unstable hard debt burdens like ZAR. However, with millions of people vaccinated per day in the United States alone, there is only so far ahead the US recovery can get before the rest of the world catches up and fulfils the 2021 forecast for a dead cat Dollar. As the Bank of England Chief Economist Andy Haldane reminded us yesterday, forecasts for economic growth, inflation and monetary policy have seldom been this broad, meaning that an economic surprise could come from a broad set of candidates. As momentum indicators in the Dollar become stretched, it should not be too long before gravity, not curiosity, kills the cat.
Discussion and Analysis by Charles Porter